Time to End Washington’s Trust Fund Gimmicks

Why do we bother with government trust funds? As the Senate’s just-passed highway bill proved yet again, Congress is turning these funds into little more than accounting shams.

In theory, it makes sense to establish special accounts where designated revenues are set aside for a specific purpose. But in practice, Washington is grossly abusing the idea.

There is a lot of money at stake here. The national debt this year will reach almost $16 trillion. Of that, the government owes nearly $5 trillion to itself. That's because Congress spends trust fund dollars on the rest of government and replaces the money with IOUs. But, as with the highway fund, the game works the other way too: The trust funds live on general revenues instead of designated taxes.

With that in mind, let’s take a quick tour of The Big Three funds:

The highway trust fund. The federal government was supposed to fund its share of highway and transit costs with six excise taxes (let’s call them the gas tax, but there are other levies as well).

The scheme worked—for a while. But while Congress has more than doubled federal highway spending over 20 years, it hasn’t increased the 18.4 cents per gallon gas tax since 1993. And cars have become more fuel efficient.

So, guess what? Trust fund balances that were once stable have now gone into the red. To fill that fiscal pothole, Congress has had to shift almost $35 billion from the general fund since 2008.

The other day, Senator Bob Corker (R-TN) correctly noted the highway bill the Senate was about to pass would make this problem worse. He opposes raising the gas tax so suggested Congress could either spend less on highways or cut other programs to offset the cost.

But he misses the point. The more we pay for highways with general revenues or by cutting other spending, the more transportation looks like any other government program. Why have a trust fund?

Medicare: Money flies from Medicare to the general fund and back at dizzying speed.

The Medicare payroll tax finances only part of one piece of Medicare—the hospital insurance program (Part A). In 2010, Part A collected only about $180 billion in payroll tax--$70 billion less than it spent. That’s why it will run out of money in a bit more than a decade.

The rest of Medicare, which paid out about $275 billion in 2010, gets no money from payroll taxes. While it collected about $62 billion in premiums, more than 40 percent of total Medicare dollars come from income taxes and other general revenues.

Thanks to the 2010 health reform law, what’s loosely called the Medicare tax will rise significantly for some high-income people starting next year. But only a 0.9 percent rate increase on wages will go to the Part A trust fund. Medicare will never see the rest (a new 3.8 percent tax on investment income). Rather, it will go to the general fund to help “pay for” health reform.

Social Security. You know the story here. Social Security uses current payroll tax revenues to pay current benefits. There is no real link between the size of the trust fund and what government owes current and future retirees.

The system now pays out more each year than it collects in taxes. And the immensely popular payroll tax cut on the books for 2011 and 2012 reduced income to the program by more than $200 billion. Congress has filled this hole by shifting other tax dollars to the retirement system. Now it must cut spending, borrow, or raise other taxes to cover this transfer. Some trust fund.

Don’t get me wrong. There is real value to trust funds. But if we are going to have them, we should take them seriously.

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